4 reasons growth pains will replace growth gains in China

As China’s growth slows, investors need to be on the look-out for Beijing’s growth pains: GRI is here to help and looks at four areas of interest

The recent trips by George Osborne and Boris Johnson to China to champion mutually beneficial investment have been given considerable media coverage in the UK. The main focus for much of this coverage has been on the various doors a stronger relationship with China will open. However, while China has plenty to offer, even after decades of rapid growth, major shortcomings remain just under the surface.

The UK has understandably been keen to establish the best possible relationship with China. Recently Britain has even been accused of softening its stance on human rights in China in an apparent bid to attract foreign investment. China has long been seen as the next dominant global force and as such many see the question being when, not if, it overtakes the United States as the number one. Although the UK will undoubtedly benefit from strengthening ties, 4 economic, environmental, and political issues are soon going to have a profoundly detrimental effect on China’s prosperity:

2. Pollution and environmental problems

The infamous air pollution affects the health of its people and domestic workforce, and obviously makes it increasingly less attractive for visitors – whether they are business people or tourists. Meanwhile, metal smelters and battery factories increase the already elevated levels of lead poisoning. In 2007, 16 of the 20 most polluted cities in the world were in China. For a developing country, such statistics are deeply concerning. Much like climate change itself, the problem has been a slow burner, but it is fast approach tipping point. It is a very real possibility that entire cities will be abandoned.

3. Poor infrastructure and water shortages

China is widely predicted to experience severe water shortages caused by over-extraction and poor infrastructure – a problem that has no real obvious short-term solution. It goes without saying that 1.3 billion people will feel the effects of any water shortages.

4. Problematic demographics hinder growth

While the first three of China’s issues all comfortably fall into the category of ‘essential living conditions’, the fourth is now totally unavoidable and irreversible: its demographics. “Because of the one-child policy, China’s population is out of whack: too few youths, too few women, too many elderly.” The primary concern is the ever-decreasing workforce. Due to the one child rule, China’s workforce is going to get a lot older, a lot smaller, and less productive in a short space of time. That fall in output is unattractive for any business considering investment. Having fewer available workers will also make labour more expensive, affecting profit margins. Furthermore, there will be a simultaneous huge increase in the number of pensioners, which will certainly cause several economic and political complexities.

Other side effects of the one child policy is that there are many more men than women in China, and many family-owned-and-run businesses will have to use external employment for the first time — an adaptation many will struggle to make, as it involves ‘trusting the unknown’. Ironically, it is the rapid expansion, and the measures taken to make growth safe and sustainable, that will actually threaten China’s position in the global race.

The Eurozone is littered with examples of how a country’s’ ingrained culture can affect its economic health (forgive the stereotypes): the efficient and frugal Germans and their strong economy; the politics-based boom and bust Britons and their indecisive flirtation between austerity or borrowing; the living-beyond-your-means Greeks and Cypriots and their resultant virtual collapse. The global economic downturn has proven that culture should not be ignored when assessing a country’s future, and it would be equally foolish to not factor in major socio-economic trends and environmental factors.

For some of the issues listed above, solutions can be sought and precautions can be taken. However, the Third Plenum has admittedly talked the talk, but may not walk the walk. “The Third Plenum provided an impressive statement of reform intentions, but it changed nothing on the ground.” These problems will not necessarily bring the nation to its knees, but they are certainly substantial enough to at least significantly slow down development and cause China to under-deliver in coming years and decades. After a prolonged period of astonishing returns and growth, it is time to expect less from China.

About Author

Matthias has extensive experience in equity & financial research and has worked in brokerage houses in London and Brussels. His specializes in the political risks, macro-economy & financial systems of both the UK and Europe. Matthias graduated with Upper Second Class Honours in BSc Accounting, Business Finance & Management at the University of York. He also graduated with a MSc Behavioural & Economic Science from the University of Warwick.